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Inflation in India being fuelled by rural riches

india Updated: Oct 28, 2013 01:31 IST
Zia Haq

Represented on a graph, India’s food inflation over the past six months looks as if it has scaled a mighty peak: from 6% in April to 18% in September. Onions alone rose 322%. While prices are bad enough to make consumers fret, the clue to pricey food could lie in their own wallets.

When weighed against manufactured products, whose prices are falling or aren’t rising as fast, food prices look fairly entrenched in a clutch of items, such as proteins, vegetables and fruit. Cereals too are trending up, despite plentiful stocks. Cement, on the other hand, has fallen 3%; iron has dipped 8% and metal prices are down 2%, an indicator of slower economic activity.

Former chief economic adviser and current World Bank chief economist Kaushik Basu gave this “skewed” divergence in prices a curious name: “skewflation”. Economists are now looking beyond textbook theories to uncover the reasons for India’s persistently high food prices.

Traditionally, food prices in India have been stoked by droughts. They typically begin dropping with a good monsoon.

After the 2009 drought, the worst in three decades, former Reserve Bank deputy governor Subir Gokarn sensed that rates of food articles were defying usual trends by not falling back to their previous levels even with normal rains. His study demonstrated that one of the reasons Indians were paying the highest food prices in a decade had to do with their radically changed diets.

Gokarn’s research points to a dramatic — though provisional — finding. Between 2004-05 and 2009-10, over 200 million Indians are estimated to have crossed two thresholds of monthly expenditure — Rs 580-690 for rural dwellers and Rs 1,100-1,380 in urban areas — at which consumption shifts to more nutritious food.

“We could be really understating the role of rural-income growth in inflation,” said Planning Commission member Abhijit Sen.

Rural incomes have continued to rise, clocking 13.1% in August 2013, although this is significantly lower than an 18% rise in 2012 and 23% in 2011. “Rising real rural wages have both supported rural demand and increased the cost of production, thereby making inflation sticky,” said Sonal Varma, the India economist of Japanese investment firm Normura Holdings.

Several factors have pushed up rural consumption, such as the rural-employment guarantee scheme, which has also made farm labour pricey, and better rural wages aligned with retail inflation.

Cereals have become costlier due to successive hikes in minimum support prices (MSP), which have risen 15% on average over the past six years. MSP is the assured base price government offers to farmers, which boosts farm income. A 10% hike in MSPs raises short-term wholesale inflation by one percentage point, according to an RBI study.

Prices of fruit and vegetables have seen huge swings because cultivation is concentrated in a few states and there’s no supply backup if crops fail in one. For example, Maharashtra alone accounts for 45% of onions and UP for a fifth of India’s mangoes.

The current spiral of onion prices will ease sooner than later, as new harvests roll in, but the bigger question about food inflation haunting economists is whether “high is the new normal”. Better wages are raising demand and cost of production both. It’s what economists call a ‘wage-price spiral’.

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